How Corporate Income Tax Works

So at least some businesses are getting better at avoiding -- or, more likely, lowering -- their corporate income tax burdens. The cat-and-mouse game that's already happening goes like this: Congress, the Internal Revenue Service and other federal agencies look to close loopholes in the current tax code while businesses and their lawyers go searching for new ones. In the meantime, some observers say that the U. S. should just scrap the corporate income tax altogether.

Those who would like to see the tax written off of the books say the idea that companies are actually paying the excise is an illusion. That's not just because businesses are making like Tim Cook & Co. and taking their talents to Ireland. Instead, they say, it's because businesses pass the tax burden over to consumers through higher prices or to employees via smaller paychecks, bonuses and benefits.

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What's more, detractors say corporate income tax proceeds only amount to about 15 percent of the tax money that the U.S. hauls in each year [source: McArdle]. If businesses didn't have to spend so much time trying to lower their tax burdens, the thinking goes, they could be focusing on things like innovation.

On the other hand, the idea of letting companies operate tax-free while hard-working Americans continue to hand over a significant chuck of their paychecks to Uncle Sam simply strikes some people as wrong. Skeptics also say they're less than convinced that businesses will simply drop prices or increase pay if the corporate income tax were lifted. Plus, some individual tax dodgers would be able to dump their income into personal businesses to reduce their burden come tax time [source: Coy].

Then, of course, there's something to be said about keeping corporate power in check. In an era where companies can influence elections by spending unlimited sums at the political horse races and plunk down increasing amounts to woo lawmakers through lobbying efforts, perhaps the corporate tax is an antidote to the Supreme Court's idea of "corporate personhood."